Petrel Resources - moderated discussion/research part II

Iraq Faces Obstacles to Oil Investment
By Thomas Wagner
Associated Press Writer

Published: Dec 23, 2005 11:35 AM EST

















LONDON (AP) - To entice foreign companies to develop Iraq's oil sector, the nation's next government will not only have to tackle violence that has scared away investors, it will also have to determine who controls the country's lucrative oil fields.


Despite the oil industry's many problems — falling production, crumbling infrastructure and relentless insurgent attacks — the prize of the world's second-largest proven reserves is so enticing that some foreign companies have taken the risk of investing.

Most have been small companies that bypass the central government in Baghdad and sign agreements with regional Kurdish officials in the north, just to get a foothold in the market. The real test will be if Iraq can manage to entice the world's top oil companies, which are needed to rebuild the industry.

That isn't expected to happen until the new government resolves the constitutional debate over the control of oil.

Kurds and Shiites, who predominate in Iraq's two main oil-rich areas — the north and south, respectively — seem determined to form virtual mini-states that have control over their oil assets and profits. Iraq's Sunni Arabs are concentrated in mostly oil-poor central Iraq and want central control over the resources to ensure they get a share of the profits.

The new Iraqi government must establish a state oil company and consider constitutional amendments that Sunnis are demanding to decide whether Baghdad continues to control oil assets or whether it shares that privilege with regional governments.

"If the election is a success, the constitutional dispute over oil supplies is resolved and a new central oil company is created, Iraq will finally start to move ahead," Issam al-Chalabi, a former Iraqi oil minister now working as an oil consultant in Jordan, said in a telephone interview ahead of Iraq's parliamentary elections last week.




Still, security fears could make it tough for the government to draw in companies such as BP PLC, Exxon Mobil Corp. and Royal Dutch Shell PLC, he said.

"I'm keeping my fingers crossed," Chalabi said. "But the new government must face the fact that nothing of substance from the large foreign oil companies is likely to happen in 2006, and the small, unknown companies already taking the risk there won't be able to do enough by themselves, even if their contracts survive the transition."

The nation's proven oil reserves, estimated at about 110 billion barrels, are the world's third largest after Saudi Arabia and Canada. Analysts predict that Iraq's oil production will average about 1.8 million barrels per day this year, about 10 percent less than 2004 levels of about 2 million barrels — and just over half the 1990 level. One reason is frequent insurgent attacks on pipelines and refineries.

The Kurds, who, like the Shiites, faced repression under Saddam Hussein, have been pushing ahead with development in the north, where they have enjoyed semiautonomy for more than a decade.

Petoil and General Energy Corp., both of Turkey, have already signed deals with the Kurds to explore and develop oil and gas fields.

"The Kurdish enclave in the north is much safer than the rest of the country, and the area is booming economically," said Orhan Duran of General Energy, which is exploring a 135-square-mile field in the north.

But the debate in the new government could endanger side deals with the Kurds. The outgoing government already has challenged the legality of oil exploration deals that Kurdish officials in the north struck with companies such as DNO of Norway to drill for oil near the border city of Zakho.

Iraq's deputy speaker of parliament, Hussain al-Shahristani, recently said exploration or production contracts made without the consent of the Oil Ministry were non-binding.

Meanwhile, Canada's Heritage Oil Corp. has formed a joint venture with Eagle Group of Iraq, which is based in northern Iraq, to develop oil and gas in the Kurdish region.

Many Sunni Arabs fear that the country could disintegrate into separate ethnic and religious regions that are virtually autonomous, if the Kurds and Shiites are allowed to cut energy deals with foreign companies and governments.

The draft constitution, approved by Iraqi voters on Oct. 15, stipulates that federal and regional governments will share management of existing fields, strategies for developing future ones and the distribution of the resulting profits.

However, the document also makes an ambiguous reference to providing compensation for areas such as the Kurdish and Shiite regions that were "damaged" and "unjustly deprived" under Saddam.

Whatever happens, Iraq's crumbling oil industry desperately needs foreign investment, which oil giants such as BP, Exxon Mobil, Shell and France's Total SA have declined to provide. These companies are training Iraqi oil workers outside the country and conducting exploration studies.

They are unlikely to risk signing production deals — which typically guarantee companies a share of oil extracted from fields they invest in — until the new government resolves the legitimacy of such contracts.

Smaller companies are willing to run the risk.

"It takes a long time to go from oil exploration to production. We want to be there when, and wherever, that opportunity arises in Iraq," said Duran of General Energy.

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Associated Press writer Selcan Hacaoglu in Turkey contributed to this report.

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